Friday, June 19, 2009

It pulls hundreds of times the g's over far less time than what I had in mind, but I do seem to have helped inspire Lenape Fire Turtle and friends. Their ice rocket is even reported to have stayed in one piece until it hit the pavement:

Next Fire Turtle tried to make a pulse jet motor out of ice injected with propane. Alas, the exhaust came out a hole melted in the side instead of the hole intended. If you look closely at the start of the side view portion of the video (the second half), you can already see the flaw in the casting where the ice is thin and the hole will appear:

Having looked ahead to a future when the economics and technologies become propitious, my own proposal was to take a grinder to an ice cylinder floating in space, melt the resulting ice flakes into water, and feed that liquid into a solar thermal rocket engine. The small snow-cone machine would gradually eat up most of the ice on the multi-year voyage from comet (or Ceres, or similar) to market. Alternatively, ammonia might be extracted from the comet and stored as a liquid inside a tank made from water ice, adding complication to the extraction process but greatly increasing the efficiency of the rocket motor and thus the mass of water ice, ammonia, or other comet stuff brought to market. More explanations of these icy and muddy daydreams lie here. When I was a kid in body as well as at heart I just stomped around in mudpuddles.

The ice rocket could in that future eliminate the need to launch from earth not just rocket propellant, but also propellant tanks -- or more precisely substitute a much lighter coat of sealing paint and sun shade for the tanks. A well-shaded vacuum can become extremely cold, preventing the ice from sublimating away. After propellant, tanks are by far the heaviest and bulkiest items that today must be launched out of our planet's deep gravity well, and ice rockets could substitute native materials for both.

Monday, June 08, 2009

In the comments section of yet another economics professor's blog, Devin Finbarr makes some excellent observations regarding the collectible nature of most investment assets, starting with this nice classification:

The demand for every investment asset -- stocks, housing, commodities, etc. -- is a function of some combination of these factors. In housing all three demand factors are at work. Every asset that is not just a fixed monetary cash flow has a collectible premium that reflects, when rational, inflation expectations. (n.b. this is technical nomenclature that can have a slightly different meaning than the normal use of the words -- for example I, and presumably Devin, classify the enjoyment one can get from collecting baseball cards or wearing gold jewelry as part of their "utility" rather than their "collectible" nature, the latter being purely a matter of the asset's perceived or actual function as a store of value or medium of exchange).

It is often very difficult to guess what the factors of demand coming from direct consumption utility are (for example, is the sunny yet cool California coast and the wealthy and smart neighbors it attracts worth paying five times as much or is the coastal California price premium, as Devin suggests, primarily a collectible premium?). Sometimes it's also difficult to estimate cash flow. Thus it's often hard to estimate the collectible premium. Also, since the collectible (or inflation expectations) premium is little recognized, a wide variety of bogus explanations are often used to explain price movements that are actually due to changing inflation expectations: the most popular being dubious theories of changes in supply (e.g. "peak oil") or consumption demand, since demand for assets as inflation hedges is very under-recognized. Also common are theories that impute price changes due to changes in inflation expectations to purely irrational psychology, "technical", or "trend" factors based on the history of the price itself. (The history of housing prices from 1940 to 2005 made houses look like a lucrative and low-risk investment, for example).

Devin describes inflation expectations as causing a hunt for stores of value in which packs of investors irrationally change their focus from one market to another, causes bubbles and bursts. Since the collectible premium is often so hard to estimate, and is so little recognized, and so many investors do despite those warnings you hear invest based solely on past price history, I don't substantially disagree with this:

A stock market is in disequilibrium when people start trading stocks as collectibles rather than as flows. In other words, instead of buying a stock based on the hope of generating a return via dividends, they start buying a stock in order to sell it to someone else ( price appreciation)....

When the government dilutes the money supply, people start searching for a replacement collectible to serve as a store of value. People end up buying stocks not based on dividend yields, but in order to trade for later at a higher dollar price. People buy houses not based on direct utility or as an alternative to paying rent, but in order to sell for later at a higher price. These goods start trading as collectibles, and thus are subject to the whims of the herd.

In short, if long-term inflation expectations were zero, the prices of housing, stocks, commodities, etc. could be estimated from demand deriving solely from their cash flow plus consumption demand -- there would be no collectible premium. But since asset prices come with a difficult to estimate and fluctuating inflation expectations premium, this makes it far harder to judge whether an asset is over- or under-priced, leading to greater over- and under-pricing, i.e. seemingly irrational asset booms and busts.

A couple of caveats:

(1) It's important to observe in the context of stocks that their cash flows can come from share buybacks and takeovers as well as dividends, so even with zero inflation expectations people would rationally invest partly for expected price rises in addition to dividends.

(2) There are a number of other sources of high uncertainty in asset markets, e.g. uncertainty over credit conditions, so that bubbles and bursts would not completely go away with zero inflation expectations. However the contribution of changing inflation expectations has, I believe, been the largest factor in most asset price movements since the 1970s.

Bubbles and bursts are based on high degrees of uncertainty about the future far more than on genuine mass irrationality. Of course, things like the Internet bubble seem quite irrational in hindsight, but if you keep in mind what was going on in the late 1990s -- a huge increase in subjective value due to new (to the vast majority of investors) Internet services such as e-mail, Web, search engines, and on-line price quotes -- it was not, without hindsight, terribly irrational to suppose that most of this value would be monetized as profit for the innovating companies. It turned out to be mostly unmonetized -- instead we got most of the foregoing plus shared music, Wikipedia, blogs, and other things of great value for almost free -- so that the Internet bubble collapsed and seems irrational in hindsight.

Bubbles and bursts due to uncertainty over technological innovation will undoubtedly occur again, but the greatest ongoing source of uncertainty in our markets is not regarding technology and monetization of innovation, but rather uncertainties about currencies, credit, globalization, and related political factors, out of which the uncertainty over currencies is usually the greatest.

My takes on last summer's commodity hysteria as it was happening can be found via here.

Devin has put these theories to good use:

since inflation helps build the bubble, even a small amount of deflation can cause rapid price collapses. The fall in price will be much greater than the fall in dividends. Late last summer I was looking at numbers, and noticed that real estate, equities, oil, and gold had all been down for two months straight. The only thing those goods have in common is the currency they are priced in. So I said, “Holy deflation, Batman!” and sold half of the index funds that I owned.

I congratulate Devin and I do like the strategy suggested here, i.e. arbitrage between asset markets with irrationally different collectible premiums. This strategy does, however, assume that one can estimate the price derived from just supply and cash flow plus consumption demand, at least enough to be able to determine that there is a substantial collectible premium.

That said, I'd add (perhaps disagreeing with Devin) that in the large collapse in commodities since last summer, decreased expectations for future industrial consumption (due to rising expectations of a long-term worldwide recession) and probably a change in the rationality of the collectible premium of commodities were also major factors alongside the decrease in inflation expectations. Thus gold did not fall nearly as much as the industrial commodities. (It's also possible that this reflects some sort of security premium in a crisis of gold over other commodities, but despite all the gold coin ads to this effect I'm skeptical about that being a large factor). Of course, a change in consumption expectations will also tend to make stocks go down, due to the more direct cause of decreased profits leading to decreased cash flows from dividends etc. Commodities markets reflected informed expectations about future inflation and consumption more quickly than stocks, giving Devin his signal.

Gold and commodities prices have a good long-term correlation across business cycles. Industrial mineral prices do tend to vary more than gold within a business cycle due to changes in consumption expectation. (Of course these are not really predictable "cycles", but unpredictable effects of things like credit conditions, but "business cycle" is the unfortunate standard term in economics for this variation in overall credit and consumption). Another example of the collectible premium arbitrage strategy is to look at the oil/gold price ratio. Last summer this ratio was far too high (in hindsight, although at the time I was skeptical that this unprecedented ratio would last), reflecting a very high valuation of industrial commodities as collectibles. Recently it has much lower, reflecting much lower valuation as collectibles (probably irrationally too low), as well as lowered consumption expectations (the business cycle). In both cases one would have profited over the course of entire business cycle (and even in these two cases, luckily, over the short run) from betting against even more extreme deviations from the average historical ratio (or historical trend -- it's certainly plausible that oil and some other industrial minerals are being depleted faster than gold, or that there are long-term secular difference in their demand functions, but as the recent oil/gold ratio collapse to 1980 levels suggests, the secular depletion/demand gap between oil and gold is probably quite small, and almost certainly less than 2% per year over the long run).

Thursday, June 04, 2009

Here's a good video lesson on the difference between legal defense of people within a dwelling and murder in a castle doctrine state. The narration by the announcer here is not clear: the unarmed (it turns out) robber goes down because the pharmacist (the defendant) has shot him in the head. The armed robber flees without firing a shot. The prosecution claims the unarmed robber then lay there unconscious, which is plausible given that the defendant turned his back on him. The prosecutor argues (correctly, if we accept the prosecution's version of the facts) that the first shot to the head was proper self-defense, whereas the later five shots (the video is sped up) were not justifiable self-defense. The defense argues that the injured robber was getting back up and thus, even though not brandishing a weapon (and as it turns out unarmed), could have posed a danger justifying the five shots that killed the injured robber. From seeing on the video the pharmacist turn his back on that robber I'm skeptical of the defense's version of the facts, but that's up to the jury.

Note that calling the police immediately afterward, as here, is a very good idea -- not calling the police as soon is one safely can is a very bad idea, suggesting guilt -- but it probably won't be enough in this case to save this guy from some jail time.

Ignatius Piazza, a self-defense trainer, has a good collection of videos on this case. Local TV station KRMG has a version with the prosecutor narrating the surveillance video (a much better but obviously biased narration).

Not mentioned in these videos is that the armed robber who ran away was also and quite properly charged with murder -- what is called a felony murder, because he committed a felony that led to a death, even death caused by a victim of that felony as here.

Technically, all the Oklahoma statute does is shift from the defendant the burden of proving "a reasonable fear of imminent peril of death or great bodily harm" when killing somebody who has forcefully entered a dwelling or vehicle -- instead the prosecutor must prove that the fear was not reasonable. Here, the burden of proof does shift to the prosecutor, but, again assuming the facts are as he claims, he should be able to prove beyond reasonable doubt either that the pharmacist in fact had no such fear, or that any such fear of harm from an unconscious man was unreasonable.

Even assuming the injured robber had regained consciousness, a much better course of action would have been to have the women at the back of the store call the police and to hold the gun to the robber's head until the police arrived.

I strongly second Ignatius' advice that if you own a gun that you may one day have to use for self-defense, that you take a good training course. Military training is not sufficient for this and indeed may have led this pharmacist, a military veteran, astray. Military doctrine is a very different thing than the civilian law of self-defense and the castle doctrine. I do take issue with Ignatius' simplistic description of a supposed "universal" rule for when self-defense is justified. Some jurisdictions allow far more defense of self, others, and persons within dwellings or vehicles than he describes (especially castle doctrine and stand-your-ground states), and some allow less. If you are going to have a gun around for self-defense, you should learn the laws of your own state, province, or country and you should train yourself accordingly. The laws vary widely. If you aren't willing to learn the laws and train accordingly, as this pharmacist apparently failed to do, you shouldn't keep a gun. By using a gun against criminals you are, morally speaking, deputizing yourself as a law enforcer -- a very good thing, since the police usually can't get there in time to protect victims, but a status that comes with a moral responsibility to train yourself in how to legally use a gun. Self-defense and castle laws give you this authority; misusing these rights is what the prosecutor properly (again assuming his version of the facts) calls "exceeding authority" and thus murder. Note that under the recent Heller Second Amendment case, self-defense and defense of others is a primary justification for our right to own a gun in the first place in the U.S.

The castle doctrine under common law, as well as the quite related knock-and-announce rule for law enforcement, comes from Semayne's case: "That the house of everyone is to him as his castle and fortress, as well for his defence against injury and violence, as for his repose...if thieves come to a man's house to rob him, or murder, and the owner or his servants kill any of the thieves in defence of himself and his house it is not felony, and he shall lose nothing." Modern castle statutes, such as Oklahoma's, often also apply this doctrine to businesses and vehicles. The Wikipedia article on the U.S. castle doctrine has a list of states with stand-your-ground laws and castle laws, with links to the statutory texts.

By the way, political scientists who define governments as entities having a "monopoly of force" are idiots. I just thought I'd get in that shot of my own while I'm here.

"Like most blogs worth my attention, this blog is updated only infrequently. That is because the authors of blogs worth my attention only post when they have something to say that is true, relevant and not already known by their audience. Most of the human race does not have the skill to know when an idea has these three properties. The skill is particularly rare in the fields of politics and economics, which is why this blog is such a rare and valuable thing." -- Richard Hollerith